Heritage Financial: Margin Tailwind Meets Merger Integration
Regional bank rides asset repricing and Big Beautiful Bill-driven demand while digesting Olympic merger.
HFWA · Earnings Call · 2026-07-23
Heritage Financial's second-quarter earnings call painted a picture of a bank executing its playbook: expanding net interest margin through asset repricing, capitalizing on post-legislation loan demand, and methodically integrating its Olympic (Kitsap) merger. The stock's steady 90-day advance (up 6.6%) reflects growing confidence in the execution.
Margin: More Room to Run
The bank reported net interest margin of 3.99%, up 3 basis points sequentially, helped by a higher-yielding investment portfolio and lower deposit costs. Management sees continued upside from loan repricing, as new commercial loan yields of 6.40% outpace the portfolio's average of 5.72%. Closing the call, Bryan McDonald underscored this optimism:Yet deposit costs may have bottomed. Don Hinson noted that the spot rate on interest-bearing deposits hit 1.64% and competition is intensifying: “I think we've probably hit bottom on that... we're going to see some gradual increases in cost of interest-bearing deposits from here on.” — Donald Hinson, Chief Financial Officer · 2026-07-23 interest bearing deposits and CD rates are now expected to creep higher as cheap funding advantages fade.In closing, we continue to see a tailwind from asset repricing benefiting our margin and believe we are well positioned to navigate what is ahead.
Expense Integration: Cost Saves in Sight
The Olympic merger remains on track, with systems conversion scheduled for late Q3. Until then, expenses stay elevated. Don Hinson guided to “Due to the fact that the systems conversion for Olympic is scheduled for late Q3, we expect elevated expense levels until Q4.” — Donald Hinson, Chief Financial Officer · 2026-07-23 He also framed Q4 as the new run rate: “Yes. I think when I mentioned that the Q4 being in the $56 million to $57 million range, that would be your run rate there going forward.” — Donald Hinson, Chief Financial Officer · 2026-07-23 The bank remains committed to realizing the cost save estimated from the merger, and the step-down in Q4 should unlock meaningful efficiency gains.Loan Demand: The Big Beautiful Bill Effect
The standout metric was commercial loan origination, which surged 104% sequentially to $339 million in commitments. Bryan McDonald credited the boost to both sales activity and broader macroeconomic tailwinds:The pipeline remains robust at $628 million. While prepayments and payoffs rose to $152 million, the bank still expects mid-single-digit annualized loan growth over the next couple of quarters. The bank is also selectively hiring bankers as market disruption from M&A creates talent opportunities. Credit quality remained pristine, with nonaccrual loans at just 0.27% of total loans and net charge-offs negligible. The bank's provision reversal of $921,000 demonstrates confidence in the portfolio. Fundamentals corroborate the narrative: Net interest income increased 29% year-over-year, and the efficiency ratio—while temporarily elevated due to merger costs—should improve once expenses normalize. The bank's net interest income rose to $69 million in Q2, up from $55 million a year ago, driven by both the Olympic portfolio and higher yields. The trajectory remains positive. Contrasting with the broader market's obsession with AI and data centers, Heritage is a traditional relationship lender riding a different cycle—one powered by the "Big Beautiful Bill" and the Pacific Northwest's resilient economy. The asset repricing story, combined with disciplined expense management, positions the bank to deliver incremental profitability as the merger synergies come through. Prior calls had already signaled this path. In April, Don Hinson forecasted reaching a 4% margin "by the end of the year or before." “I expect to reach the 4% by the end of the year or before.” — Donald Hinson, Chief Financial Officer · 2026-04-23 And in January, he reiterated the longer-term improvement: “we expect to see margin improvement to continue over the next year or 2.” — Donald Hinson, Chief Financial Officer · 2026-01-22 Now, with the merger integration and conversion done, those promises are becoming tangible.We've seen loan demand increasing since last summer after the Big Beautiful Bill.